Money
Benefits from home loan interest saver accounts
Summary
- With interest rates on loans set to rise, this could be a smart savings option for customers
With the Reserve Bank of India hiking the repo rate by 90 basis points in the course of a little over a month, the equated monthly instalments (EMI) of loans are set to rise. If you are planning to take a home loan, however, there may be some relief at hand. You can consider going for, what is called, a home loan interest saver account or smart loan. Lenders have different names for this product—for instance, it’s called Money Saver Home Loan at ICICI Bank, MaxGain Home Loan at SBI and Home Saver at Standard Chartered Bank. The interest saver account may not, however, work for every home loan borrower.
Twin benefits
Under this, your home loan account gets linked to a current account. You can deposit any surplus funds in this account to bring down your interest liability. The bank will take into account the difference between the outstanding loan amount and the surplus parked, on a daily basis, to arrive at the interest on your loan. So, if we assume you have an outstanding loan of ₹50 lakh and you hold ₹20 lakh in the interest saver account, then the interest on the loan will be calculated on ₹30 lakh. Since banks usually adjust the loan tenure while keeping the EMI unchanged, the lower interest component will translate into a reduced loan tenure. You should contact your bank if you want the EMI to be changed.
In addition, the interest saver account gives you the flexibility to withdraw the surplus (referred to as an ‘overdraft’ facility by some) that you have parked, any time. Naturally, if you choose to withdraw some of this surplus, the interest component of your loan will go up accordingly.
Financial planners that we spoke with said that one can use the interest saver account as a liquidity and contingency fund. “In any case, one will maintain some balance in the bank account or park money in liquid funds. Instead, you can put any surplus in an interest saver account and save on interest cost," says Suresh Sadagopan, principal officer at Ladder7 Wealth Planners.
According to Vishal Dhawan, founder & CEO, Plan Ahead Wealth Advisors, the interest saver account, given its flexibility, can be useful for parking money that may be deployed in different ways or for goals that may be uncertain (for Indian or foreign education, for example) or the amount to be spent is not known upfront.
Take note
But before you think it’s a win-win deal, note that such loans come with a slightly higher rate of interest. “Interest saver home loans usually charge 0.5-0.6% (50-60 basis points) additional interest compared to the normal home loans," says Harshad Chetanwala, co-founder at MyWealthGrowth.com. So, unless you regularly park a sufficient sum in the linked current account, this may backfire. “This can work well for salaried individuals as they usually keep a reasonable amount in their bank account as contingency fund. This money can be withdrawn based on their needs and at the same time help them save on interest on their loans," he adds.
Apart from that, such loans may also come with part pre-payment and pre-closure charges, something that may not be applicable to the usual home loans. For example, Standard Chartered Bank doesn’t charge for part pre-payment or pre-closure of floating rate loans (which includes home loans) given to individuals. But, part pre-payment beyond a certain amount of the principal outstanding, and pre-closure in case of a home saver loan, entails payment of a fee.
Pre-payment vs interest saver
As an alternative to the home loan interest saver account, one could simply go for a regular home loan (which has a relatively lower interest rate) and make part pre-payments, whenever possible. This, too, will help reduce your interest liability.
According to Sadagopan, if you would like to retain the flexibility to draw on your surplus along with the benefit of reducing the interest on loans, the interest saver account can serve you better. But, if you prefer the idea of paying off your loan faster and are unlikely to require this money later, part pre-payment on a regular home loan could be a better alternative.
Remember though, not all banks offer this facility with their home loans.
Dhawan sums it up as follows: “If you have the discipline to not keep dipping into the interest saver account, then it works better than pre-payment. Otherwise, the latter may be better." He also emphasizes that one must keep in mind the opportunity cost of the money lying in the interest saver account. For example, if you decide to utilize this money to fund your child’s education, instead of going for an education loan (which attracts higher interest than a home loan), then this may be good use of the money. However, spending it on other things may not be so.
